BHI Trust: the walls start tumbling down

What motivated investors to place billions of rands into a largely unknown, average-performing collective investment scheme? Financial experts and a lawyer have been asking this question since the BHI Trust scandal broke.

According to an article in the Daily Maverick published last week, investments in BHI Trust – speculated to be worth around R3bn – are at risk after trustee and fund manager Craig Warriner allegedly handed himself over to the authorities and confessed to fraud earlier in the month. The publication stated that hundreds of investors had received alerts from their brokers, notifying them of Warriner’s arrest, the involvement of fraud, and his custody status after voluntarily surrendering to the police.

In his confession, Warriner allegedly admitted to using the trust’s funds in a highly irresponsible manner, referring to it as “using the funds of Peter to pay Paul”, a practice which allegedly began after the 2008 global financial crisis. This admission has left investors and beneficiaries of the trust deeply concerned about the security of their investments.

Others who ought to be worried at this point are intermediaries who may have promoted or facilitated investment in BHI Trust.

Unauthorised financial services

The FSCA has confirmed that it is investigating BHI Trust and “other persons”.

In a media statement released last week, the Authority said its investigation was focused on the activities of the trust and the possibility that it was conducting unauthorised financial services business and unauthorised collective investment scheme business.

“The FSCA confirms that none of the parties under investigation are authorised as financial services providers or licensed as collective investment schemes managers,” the statement read.

The Authority added it has extended its investigation to include regulated entities that may have promoted the products of BHI Trust.

If found to have done so, this is a serious contravention of financial laws, and may be subject to a fine, debarment, and the possible withdrawal of a licence, the FSCA said.

The FAIS Ombud, Advocate John Simpson, told Moonstone that his Office has no historical complaints related to BHI Trust or Warriner. But Simpson said it has received one complaint in the past few days against the trust.

“It has only just been registered. Unfortunately, we cannot provide any information relating to the complaint, as it is confidential,” Simpson said.

Moonstone also contacted the Specialised Commercial Crime Unit to confirm Warriner’s arrest and to enquire about the charges brought against him. No feedback has yet been received.

‘Giant red flag’

Warriner has been described as “low-profile”, with no LinkedIn account or any other promotional material to be found online advertising his prowess as a money manager. And contrary to what is usually the case with Ponzi schemes, clients were not promised unrealistic returns on their investments. According to accounts, the returns were about 8% to 10% a year.

While investors anxiously wait for more information to be divulged, various experts have taken to the airwaves to share their opinions and deductions. In an interview with BizNews, renowned trader and investor David Shapiro told editor Alec Hogg that Warriner wasn’t the only person who was going to fall once the authorities began unravelling what happened.

“There are going to be a lot of people at fault,” Shapiro said.

In a Cape Talk interview, Simon Brown, financial educator at Just One Lap, told broadcaster Bruce Whitfield that, as he understood it, Warriner was using the trust to manage third-party money. Brown added that a trust was an extremely unusual structure to be used for a collective investment scheme. He said you would usually set up a beneficiary for your partner or children, for example, with them as the beneficiaries of the trust. He said a trust wasn’t designed for multiple members – who weren’t direct beneficiaries of the trust – to invest to.

“That to me was the giant red flag. There are so many other vehicles that are recognised and have proper controls around them to try and prevent this sort of outcome,” Brown said.

Warriner is one of two trustees of the trust; the other is Christian Ashcroft. According to BizNews, Ashcroft was one of the original complainants about Warriner. Ashcroft claims to have been deceived and has sought legal advice from attorney Caitlin Gottschalk.

Speaking to Hogg last week, Gottschalk said “it was shocking that any licensed FSP company would transact with someone like Warriner, but it seems multiple companies have done that”.

She said the main reason Ashcroft approached the law firm was to help him engage with the Commercial Crimes Division and the Hawks and ensure he was taking the proper steps to secure the funds.

The attorney said they were waiting for the appointment of a curator for the trust.

Due diligence

A FAIS Ombud ruling published on 25 January 2012 held an adviser liable for a R600 000 loss and ordered him to repay the amounts invested by his clients: his in-laws.

The ruling concerned investments made via an FSP in Edwafin, a venture capital company in KwaZulu-Natal.

The company came to prominence in 2005 with a debenture offer that promised investors returns of 18%. According to the Ombud’s determination, “Edwafin issued debentures in terms of the Companies Act and marketed them through Edwabond (a subsidiary of Edwafin). Edwabond was thus subject to and bound by the provisions of the Financial Advisory and Intermediary Services Act”.

In October 2008, the firm stopped paying interest to investors, and about seven months later, Edwafin was placed under provisional liquidation by the High Court in Pietermaritzburg. To this day, none of the estimated R230 million invested has been recovered, nor have any of the parties involved in the firm been prosecuted.

Read: Former Edwafin CEO gets 10-year prison sentence for running a Ponzi scheme

In the case heard by the Ombud, the adviser involved had invested R600 000 for his critically ill father-in-law in the scheme in February 2008.

Read: Edwafin chickens come to roost

The Ombud held the adviser liable for the loss, and he was ordered to repay the amounts invested to his in-laws.

One of the findings that underlined the Ombud’s ruling was the adviser’s failure to conduct a proper due diligence of the product and the company. It was seen by the Ombud as a “failure to act with the due care and skill required”.

Considering the similarities in these two investment schemes gone wrong, it is likely that the legal responsibility of intermediaries to act with due care will at some point come under the spotlight. But as history has also shown, it will take some time.